Search This Blog

South Asia Investor Review is focused on reporting, analyzing and discussing the economy and the financial markets of countries in South Asia, including Pakistan, Bangladesh and Sri Lanka. For investors looking to invest in emerging markets beyond BRIC countries (Brazil, Russia, India and China), this blog is designed to help international investors looking to learn about investing in South Asia with focus on Pakistan. Riaz has another blog called Haq's Musings at http://www.riazhaq.com

Shanghai Bourse in Bid to Buy 40% Stake in Pakistan Stock Exchange

The Shanghai Stock Exchange has submitted a letter of intent to buy up to 40% stake in the Pakistan Stock Exchange, according to report in The Nikkei Asian Review. The Shanghai Stock Exchange has the world's fourth largest market cap. The possible Pakistan tie-up could encourage Chinese companies to expand into the South Asian country and perhaps even list on the PSX.

In August this year, Bloomberg News reported Shanghai Electric's US$1.6 billion for 66% stake in K-Electric, Karachi's main electric utility.

In the same week in July, Turkey's Arcelik announced purchase of Dawlance, Pakistan's market-leading home appliance maker.

Both cited opportunity for double-digit growth in the emerging market as the main reason for their acquisitions.

Shanghai Bourse's Bid:

If the Shanghai Bourse's bid succeeds, it will represent the first purchase of a stake in a foreign stock exchange by a Chinese bourse. In June, global index provider MSCI upgraded Pakistan to emerging markets status while keeping Vietnam as a frontier market, because the former has much better market liquidity.

The Shanghai Stock Exchange has the world's fourth largest market cap. The possible Pakistan tie-up could encourage Chinese companies to expand into the South Asian country and perhaps even list on the PSX.

Pakistan Top Performing Market in Asia:

As of Sept 30, 2016, KSE100 index, the PSX's key stock index, has gained almost 24 percent year to date making Pakistan the best performing market in Asia. Vietnam and Indonesia follow with returns of 18% and 16.8%, respectively, while India’s Sensex Index has gained only 6.7%.

PSX official Ayyaz Afzal told The Nikkei Asian Review that "Shanghai is one of two stock exchanges who submitted us letters of intent (to acquire PSX stakes)".

The other bidder is a bourse in the Middle East. Afzal said the PSX could receive additional letters of intent by December, and "before March 2017, I think there will be some positive news about the strategic investor," he said.

A total of 576 companies are listed on the PSX, with an aggregate market cap of slightly higher than 8 trillion rupees (US$80 billion), according to Nikkei Asian Review. Pakistan, the world's sixth most populous nation, is home to some 190 million people. Its economy in 2015 was the globe's 41st largest, at $270 billion.

ADB Pakistan Forecast:

The Asian Development Bank (ADB) has recently raised Pakistan's economic growth forecast for fiscal year 2017 (from July 2016 to June 2017) from 4.8% to 5.2%. The Bank also sees brighter outlook for the the entire South Asian region. However, the prospects of even a limited India-Pakistan war could derail the economies of the entire South Asia region. I hope that sanity will prevail in New Delhi to tone down its war rhetoric, abstain from escalation and maintain the current economic momentum.

Summary:

Pakistan's economic recovery is in full swing with double digit growth in multiple industries, including auto, pharma, chemicals, cement, fertilizers, minerals, etc. It is expected to pick up steam over the next several years with new investments on the back of China-Pakistan Economic Corridor related projects. Prospects of even a limited war in South Asia could derail the economies of the entire region. I hope that sanity will prevail in New Delhi to abstain from escalation and maintain the current economic momentum.

In a development that may raise eyebrows in a highly competitive cement industry, a Chinese investor has expressed interest in due diligence of Dewan Cement Limited in order to acquire a stake in the company.

“We have received a request through email from a potential Chinese strategic investor seeking permission for due diligence of Dewan Cement, which may eventually lead to acquisition of shares in our company,” said a company notice sent to the Pakistan Stock Exchange on Friday.

“We intend to permit due diligence; if any material development takes place, we will communicate the same to the (stock) exchange and the Securities and Exchange Commission of Pakistan.”

The development is expected to create an interesting situation in the cement sector where a number of companies are already vying to increase their market share.

“If this due diligence results in some deal, the new investor will most likely install a new plant which may take up to three years to start operations. So this is not an immediate threat to the cement cartel,” Sherman Securities analyst Sadiq Samin told The Express Tribune.

“The due diligence process will itself take two to three months and then we will have to look how it affects the market.”

This would not cause any jitters because cement demand was growing continuously, he said when asked whether the entry of a foreign player would spark fears.

Dewan Cement has a production capacity of around 2.88 million tons per annum, constituting 6.1% of the total installed capacity of 45.6 million tons of the cement industry. It has two manufacturing units including Pakland Cement and Saadi Cement.

Analysts suggest that the situation would have been different if the company had installed a new plant and the Chinese player could immediately start manufacturing cement after taking it over.

Pakland Cement was established in 1981 at Deh Dhando in Malir district, Karachi. The plant was fully operational by 1985 and producing Ordinary Portland Cement.

Anticipating a further growth in demand, cement companies are aggressively engaged in expansion of their plants.

Cherat Cement, Attock Cement, DG Khan Cement and Lucky Cement have already announced expansion plans and these plants will come online over the next three years. The combined investment by these players is expected to be in the range of $700 million to $1 billion.

The construction sector, a major consumer of cement, posted an excellent 13% growth in fiscal year 2015-16 compared to average growth of 4% in the past four years due to economic recovery and the booming real estate sector, according to the Pakistan Economic Survey 2016.

The government expects construction-related activities to pick up further momentum on the back of increasing public sector development spending coupled with massive infrastructure and power projects under the China-Pakistan Economic Corridor (CPEC).

Pakistan has plowed an independent trajectory this year, outperforming both its fellow frontier markets and members of the emerging-market grouping that it is slated to join in 2017.

The country's benchmark KSE100 Index has rallied 27 percent year-to-date to become Asia’s best-performing equity market in 2016, according to a basket of 26 peers tracked by Bloomberg. The market received a boost in June when MSCI Inc. announced that it would reclassify Pakistan as part of its benchmark emerging-market index from May 2017 — a show of confidence that it declined to extend to China.

It was a long time coming for South Asia's second-largest economy. The Pakistan Stock Exchange, previously known as the Karachi Stock Exchange, was downgraded to frontier-market status in 2009 after it introduced curbs against sell orders to stem an investor exodus in late 2008.After registering gains over seven of the eight years since, investors are betting it still has further to climb.

"The benchmark index can easily reach 60,000 before the general election in 2018," said Vasseh Ahmed, who's chief investment officer of Karachi-based Faysal Asset Management Ltd., in an interview. That represents almost a 50-percent increase from present levels. "Now that the IMF program is over, the government will be giving incentives that will positively impact the market and business sentiment. The boost from the upgrade and Chinese investment is also there.".

The KSE100 Index reached its all-time peak of 41,464.31 last Friday, and by 2:23 p.m. in Karachi was heading toward a new record. Last month Pakistan completed a three-year $6.6 billion International Monetary Fund loan program. Thanks to the aid, Prime Minister Nawaz Sharif was able to avert a balance-of-payments crisis and boost foreign-exchange reserves to a new high.

"Textile is already seeing the push, and the government may further boost the agriculture sector. The banking sector will also rebound given interest rates have bottomed, while the oil and gas sectors are rallying following a recovery in energy prices and infrastructure development," added Ahmed. The country's central bank has held its benchmark interest rate at 5.75 percent since cutting by 25 basis points in May. For Federico Parenti, Milan-based fund manager of Base Sicav Emerging and Frontier Markets Equity Fund, Pakistan is on top of his wish-list."My fund is currently waiting to get access to such a beautiful and nice market," Parenti said by e-mail. "At the moment Pakistan access is delayed due to fear of political and religious risks, but I think staying just in Europe for investment and thinking other places won't change for the better is a bigger risk."

-------

For Parenti, the improvements that are predicted by EFG Hermes to lure around $475 million of inflows by the middle of next year do, in themselves, carry risks."Because of the MSCI upgrade, the ratio of foreigners holding onto Pakistani stocks is set to increase," the fund manager said. "But they will also add volatility since most of the money is 'disloyal,' meaning that they can easily pull their money out of the country whenever they want."

Still, he said he plans to allocate 10 percent of his funds to Pakistan once regulators give the go-ahead, with these challenges failing to overwhelm to the country's enticing demographics. "The prospect is bright with the growing young population and the rising middle class. I want a piece of your economy — a piece of your frozen food, a piece of your cement, and a piece of your hospitals," he wrote.

According to the analysis, 99 per cent of actively managed US equity funds sold in Europe have failed to beat the S&P 500 over the past 10 years, while only two in every 100 global equity funds have outperformed the S&P Global 1200 since 2006. Almost 97 per cent of emerging market funds have underperformed.

Stewart Aldcroft, senior adviser on the Asian fund industry at Cititrust, the fund services business of Citigroup, the US bank, said: “The S&P figures have become a massive boon for the ETF industry, which has been able to use them to show the benefit of passive investing.

“The active industry has built a whole range of arguments against [S&P’s statistics], but until they start to consistently achieve better returns, they will continue to be on the back foot.”

Last week politicians and consumer protection groups questioned the integrity of Europe’s €13.3tn asset management industry at an event specifically convened to look at the role of the asset management market.

Attendees at the meeting, held at the European Parliament and organised by Sven Giegold, a Green MEP, accused investment houses of overcharging their clients and failing to put investors first.

Mr Giegold, who co-organised the event with Sirpa Pietikäinen, an MEP from the European People’s party, said that “high costs” were hurting investment returns.

Assets managed in passive mutual funds, which provide lower-cost exposure to markets by tracking an index, have grown four times faster than traditional active products since 2007, according to Morningstar, the data provider.

Assets held in passive mutual funds have grown 230 per cent globally, to $6tn, since 2007. However, assets held in active funds total $24tn.

DUBAI, Oct 30 Abraaj Group has agreed to sell its majority stake in Pakistan's K-Electric to Shanghai Electric Power Co (SEP) for $1.77 billion, the emerging market-focused private equity firm said on Sunday.

The transaction is the largest M&A deal in Pakistan in a decade, and comes at a time of heightened Chinese interest in investing in the South Asian nation as part of its "One Belt, One Road" initiative.

Abraaj-controlled KES Power will divest the 66.4 percent stake subject to regulatory approvals being obtained.

SEP was among a number of Chinese bidders, including China Southern Power Grid, which were lining up to acquire the stake, sources told Reuters in August.

Chinese companies' interest comes after China last year announced energy and infrastructure projects worth $46 billion in Pakistan, with a view to opening a trade corridor linking western China with the Arabian Sea.

K-Electric is Pakistan's biggest electricity company, supplying power to 2.5 million customers in and around Karachi, the country's biggest and wealthiest city.

The private equity firm first acquired its stake in K-Electric in 2009, but said in June 2014 that it had mandated Citigroup to evaluate options for the investment.

"SEP will leverage its own strengths as a strategic investor and further realize K-Electric's potential to provide better services to the people of Pakistan and the government of Pakistan," SEP Chairman Wang Yundan said in the statement. (Editing by Andrew Torchia and Susan Fenton)

Karachi: Pakistan’s main bourse is to sell a 40 per cent stake next week, a company official said on Friday, citing Chinese and British consortia as among the prospective buyers.At least 17 entities have expressed an interest in the Pakistan Stock Exchange (PSX), whose benchmark stock index was one of the best performing indices worldwide in 2016, gaining 38 per cent so far.The PSX is currently owned by more than 300 Pakistani brokers.“We are opening bidding for the 40 per cent share of the PSX on December 15,” Shahzad Chamdia, chief of a PSX divestment committee, told AFP.Analysts estimate the deal will be worth around $225 million (Dh826.2 million), but the committee declined to comment.

“We have the reference share price being evaluated by a third party and will reveal it only on the bidding day,” Chamdia said.Sources at the PSX said a consortium consisting of the Shanghai Stock Exchange, the Shenzen Stock Exchange and a Chinese fund is bidding, as well as another consortium of UK financial institutions led by Nasdaq Technology.Chamdia did not reveal the names of either consortia but confirmed that Chinese and British stock companies were in the running.Other bidders include Pakistani banks and financial institutions, but their chances of winning are thought to be unlikely.Following the sale, the company plans to offer 20 per cent of its shares to the public, Chamdia said.Under its stock exchange reforms, Pakistan merged its three stock exchanges — the Karachi Stock Exchange, the Lahore Stock Exchange and the Islamabad Stock Exchange — to form the PSX in January this year.The benchmark KSE index of 100 shares was at its highest ever level of 45319 points on Friday, compared with 32816 points on January 1.

Karachi: China's Shanghai Electric plans to spend $9 billion overhauling electricity infrastructure in Karachi, a minister told AFP, just months after the multinational revealed it was buying a Pakistan power company.China is ramping up investment in its South Asian neighbour as part of a $46 billion project unveiled last year that will link its far-western Xinjiang region to Pakistan's Gwadar port with a series of infrastructure, power and transport upgrades.

In a presentation made to Pakistani authorities, Shanghai Electric said it would invest an average of $700 million a year until 2030 to increase capacity, improve cabling and target bill defaulters.

"The investment would be utilised in distribution, generation, transmission" and training, Miftah Ismail, minister for state and chairman of Pakistan's Board of Investment told AFP on Wednesday.

The investment would also aim to tackle widespread electricity theft and other losses that cost about $269 million a month in the city, partly by replacing above-ground grid stations with underground ones.

Shanghai Electric announced in August it would buy a majority stake in K-Electric, which is owned by Abraaj Group of Dubai, for $1.7 billion, which would be Pakistan's biggest ever private-sector acquisition.

K-Electric, formerly known as Karachi Electricity Supply Corporation, supplies electricity to more than 2.2 million households and commercial and industrial consumers.

A Chinese-led consortium, including the Shanghai Stock Exchange, emerged as the top bidder Thursday for a 40% stake in the Pakistan Stock Exchange, one of the best-performing markets in Asia this year.

The Pakistan Stock Exchange, formerly the Karachi Stock Exchange, said the consortium includes three Chinese exchanges: the China Financial Futures Exchange as the lead bidder, the Shanghai Stock Exchange, and the Shenzhen Stock Exchange. The consortium also includes two Pakistani financial institutions: Pak China Investment Company Limited and Habib Bank Ltd.

The consortium’s winning offer, subject to regulatory approval, of 28 rupees ($0.27) per share values the stake at $85.5 million, and the exchange at $213.7 million.

The Pakistan Stock Exchange has been one of the best-performing markets in Asia this year, with its benchmark KSE 100-stock index gaining 42% this year. MSCI announced in June this year that it will upgrade Pakistan, earlier classified as a frontier market, to include it in its Emerging Markets Index.

The sale of the 40% stake is “big news not only for us, but also for the country,” said Shehzad Chamdia, chairman of the Pakistan Stock Exchange divestment committee. “I think it will be a game changer for our capital markets.”

Mr. Chamdia said the consortium’s offer is structured so that the three Chinese exchanges will have 30% of the exchange, while the two local partners will have 5% each. Along with board seats, the consortium will also get to nominate the CEO and CFO at the exchange, Mr. Chamdia said.

Pakistan has seen major Chinese investment in recent months, especially under the China-Pakistan Economic Corridor, a multibillion-dollar infrastructure program to upgrade the land route between the two countries and also boost Pakistan’s energy generation capacity.

Separately, China’s state-owned Shanghai Electric Power Co. acquired a controlling stake in K-Electric, the power utility in Karachi, Pakistan’s largest city.

Prime Minister Nawaz Sharif’s government considers boosting foreign investment a key pillar of its plan to revive Pakistan’s economy, and has pointed to the performance of the country’s stock exchange during his tenure as a sign of economic progress.

Late last year, three Chinese exchanges jointly submitted the highest bid for a 40 per cent stake in the Pakistan Stock Exchange. They paid almost Rs9bn, or $85m. Weeks after the deal, the market hit an all-time high.

This year has been a good time to be a broker in Karachi, especially after index provider MSCI announced last summer it was restoring the country to emerging market status after downgrading it to frontier status after the financial crisis. In March, local brokers with stakes in the PSX received cheques when the Chinese transaction closed. Since then, they have been sending roadshows to financial capitals to sing the praises of the Pakistani market.

The Chinese investment in the the Pakistan stock market is not officially part of the China Pakistan Economic Corridor (CPEC), which is itself part of the broader, One Belt, One Road initiative designed to strengthen trade links between China and Europe. Yet the biggest reason to be optimistic about Pakistan is the Chinese investment that is pouring into the country.

More than $55bn is expected to come into the country in the next five years, according to a forecast from the Pakistan Business Council. Beijing is doing for Pakistan what the country cannot seemingly do for itself — provide functioning infrastructure. The most critical of these involves building power plants to solve the country’s perennial energy shortage, which has become one of the biggest constraints on economic growth.

Last year investors latched on to what Chinese investment might mean for Pakistan. The stock market is up more than 40 per cent over the past 12 months, and touched a record high in January. However, its momentum has slowed, rising only about 3 per cent this year.

Investors must decide whether China will be a long-term game changer for corporate Pakistan — or whether China itself will be the biggest beneficiary of CPEC. Will local steel, cement and heavy chemical companies see a huge uptick in orders? Will Chinese capital invest in the Pakistani cement and steel industry, where being local is an advantage given high transport costs. Or will Chinese companies see a boost to revenues as a result of Chinese investment?

“With the China connection, it is difficult to go wrong; that is key,” argues Mark Mobius, executive chairman of Templeton Emerging Markets Group. “Three years ago, we went big in Pakistan when everyone was down on it.”

Yet the evidence so far is mixed. Many contracts are not public, but Chinese companies that have received contracts to help construct some of the power plants have been guaranteed equity returns from the projects. Moreover, until the Pakistani business community rose in revolt, Chinese steel imports were duty-free.

Chinese investment is not the only reason to buy Pakistan. Law and order has improved, although progress seems fragile. Growth, which came in at under 5 per cent last year, is expected to rise to 5.2 per cent this year, according to the Asian Development Bank. Consumer spending is strong. The cost of capital is at a 43-year low, according to data from the Pakistan Business Capital. Pakistani management talent — whether at multinationals such as Unilever or local companies such as Engro or National Foods — is impressive.

But reasons to be bearish are not hard to find. The country’s exports are declining, while those at competitors such as Vietnam and Bangladesh are growing. Manufacturing as a percentage of GDP is shrinking, and is a mere 13 per cent today. Remittances are down, while the balance of payments is under pressure.

The wave of Chinese investment will make a huge difference to Pakistan. That much is not in dispute.

But it is possible that alongside the power plants, roads and ports, China’s investment will leave a trail of bad debts. For now, of course, Karachi brokers will be hoping Beijing’s interest lifts the domestic stock market to new highs.

Popular posts from this blog

San Francisco based Cloudcade has announced it will invest $6 million to set up a game development studio in Lahore, Pakistan, according to Venturebeat.

The Lahore studio will be led by Ammar Zaeem, cofounder of Pakistan’s mobile game studio Caramel Tech which already has a team of 50 engineers.
The move is a big investment into Pakistan as a tech hub, and it shows how the game business is expanding around the globe.

Cloudcade:

Founded by Di Huang in 2013, Cloudcade is known for its popular multiplayer game "Shop Heroes" that pits players against each other in a competition to create the best shop they can. If a player can make a better store and perform more tasks than his or her rivals, he or she wins.

The game is available on the Apple iOS App Store, Google Play, Samsung Galaxy Store, Amazon, Kongregate, and Facebook. It is now also supported on the Apple Watch.

43.5% of Indians, the highest percentage in the world, say they do not want to have a neighbor of a different race, according to a Washington Post report based on World's Values Survey.

About Pakistan, the report says that "although the country has a number of factors that coincide with racial intolerance – sectarian violence, its location in the least-tolerant region of the world, low economic and human development indices – only 6.5 percent of Pakistanis objected to a neighbor of a different race. This would appear to suggest Pakistanis are more racially tolerant than even the Germans or the Dutch".

Housing Discrimination:

It appears that there is a small but militant minority in Pakistan that is highly intolerant, but the vast majority of people are tolerant. My own experience as a former Karachi-ite is that there is little or no race or religion based housing segregation, the kind that is rampant in India where Muslims are not welcome in most Hindu-dominated neigh…

Pakistan's human development ranking plunged to 150 this year, down from 149 last year. It is worse than Bangladesh at 136, India at 130 and Nepal at 149. The decade of democracy under Pakistan People's Party and Pakistan Muslim League (Nawaz) has produced the slowest annual growth rate in the last 30 years. The fastest growth in Pakistan human development was seen in 2000-2010, a decade dominated by President Musharraf's rule, according to the latest Human Development Report 2018.

Human Development in Pakistan:

UNDP’s Human Development Index (HDI) represents human progress in one indicator that combines information on people’s health, education and income.

Pakistan saw average annual HDI (Human Development Index) growth rate of 1.08% in 1990-2000, 1.57% in 2000-2010 and 0.95% in 2010-2017, according to Human Development Indices and Indicators 2018 Statistical Update. The fastest growth in Pakistan human development was seen in 2000-2010, a decade dominated by President M…

I am the Founder and President of PakAlumni Worldwide, a global social network for Pakistanis, South Asians and their friends. I also served as Chairman of the NEDians Convention 2007. In addition to being a South Asia watcher, an investor, business consultant and avid follower of the world financial markets, I have more than 25 years experience in the hi-tech industry. I have been on the faculties of Rutgers University and NED Engineering University and cofounded two high-tech startups, Cautella, Inc. and DynArray Corp and managed multi-million dollar P&Ls. I am a pioneer of the PC and mobile businesses and I have held senior management positions in hardware and software development of Intel’s microprocessor product line from 8086 to Pentium processors. My experience includes senior roles in marketing, engineering and business management. I was recognized as “Person of the Year” by PC Magazine for my contribution to 80386 program. I have an MS degree in Electrical engineering from the New Jersey Institute of Technology.
www.pakalumni.com
http://www.riazhaq.com
http://southasiainvestor.blogspot.com